Fitch sees challenges on the horizon along with the sector’s improvements in its game over the past few months. For one thing, the agency says it expects continued deterioration in property level fundamentals for the remainder of the year, a decline which it says “may persist beyond this year for several sectors.”

Coverage metrics are also expected to decline, Fitch says. It says it expects recurring operating EBITDA to decrease modestly due to soft fundamentals, while REITs’ blended cost of debt capital will rise, due to an increase in Libor and higher all-in yields on new debt.

Leverage is also expected to continue to remain elevated, according to Fitch’s report. Although down from its peak 7.4x to a median of 6.2x as of the end of March, it’s far higher than the 5.0x seen 10 years ago.

“With the exception of a few companies, future equity issuance will likely not be used to delever, but will instead be paired with acquisitions or other opportunities,” according to Fitch. “While there is no near-term catalyst for significant leverage reduction, many companies are organically deleveraging by retaining more cash by having cut dividends in 2009, and the lease-up of vacant space could improve recurring operating EBITDA.”

As liquidity improves for the sector, Fitch says its expects REITs to be “active participants” in acquiring overleveraged assets that come to market. “REITs will likely look to take advantage of this cycle by being net acquirers of both equity and debt positions in real estate investments,” Fitch says in its report. The agency predicts that some private, overleveraged landlords may go public to access the equity capital available to REITs, a trend that has also been reported in GlobeSt.com's sister publication Real Estate Forum. Click here to read the complete article.